California Joins States Insulating VoIP Providers from Local Public Utility Regulators

On Friday, California Governor Jerry Brown signed SB 1161, which prohibits the state’s Public Utilities Commission from any new regulation of Voice over Internet Protocol or other IP-based services without the legislature’s authorization.

California now joins over twenty states that have enacted similar legislation.

The bill, which is only a few pages long, was introduced by State Senator Alex Padilla (D) in February. It passed both houses of the California legislature with wide bi-partisan majorities.

California lawmakers and the governor are to be praised for quickly enacting this sensible piece of legislation.

Whatever the cost-benefit of continued state regulation of traditional utilities such as water, power, and landline telephone services, it’s clear that the toolkit of state and local PUCs is a terrible fit for Internet services such as Skype, Google Voice or Apple’s FaceTime.

Historically, as I argued in a Forbes piece last month, the imposition of public utility status on a service provider has been an extreme response to an extreme situation—a monopoly provider, unlikely to have competition because of the high cost of building and operating competing infrastructure (so-called “natural monopoly”), offering a service that is indispensable to everyday life.

Service providers meeting that definition are transformed by PUC oversight into entities that are much closer to government agencies than private companies. The PUC sets and modifies the utility’s pricing in excruciating detail. PUC approval is required for each and every change or improvement to the utility’s asset base, or to add new services or retire obsolete offerings.

In exchange for offering service to all residents, utilities in turn are granted eminent domain and rights of way to lay and maintain pipes, wires and other infrastructure.

VoIP services may resemble traditional switched telephone networks, but they have none of the features of a traditional public utility. Most do not even charge for basic service, nor do they rely on their own dedicated infrastructure. Indeed, the reason VoIP is so much cheaper to offer than traditional telephony is that it can take advantage of the existing and ever-improving Internet as its delivery mechanism.

Nor would residents be in any way helped by interposing a regulator to review and pre-approve each and every change to a VoIP provider’s service offerings. Rather, the lightning-fast evolution of Internet services provides perhaps the worst mismatch possible for the deliberate and public processes of a local PUC.

Software developers don’t need eminent domain.

But the most serious mismatch between PUCs and VoIP providers is that there is little inherently local about VoIP offerings. Where a case can be made for local oversight of public utilities operating extensive–even pervasive–local infrastructure, it’s hard to see what expertise a local PUC brings to the table in supervising a national or even international VoIP service.

On the other hand, it’s not hard to imagine the chaos and uncertainty VoIP providers and their customers would face if they had to satisfy fifty different state PUCs, not to mention municipal regulators and regulators in other countries.

In most cases that would mean dealing with regulators on a daily basis, on every minor aspect of a service offering. In the typical PUC relationship, the regulator becomes the true customer and the residents mere “rate-payers” or even just “meters.”

Public utilities are not known for their constant innovation, and for good reason.

Whatever oversight VoIP providers require, local PUCs are clearly the wrong choice. It’s no surprise, then, that SB 1161 was endorsed by major Silicon Valley trade groups, including TechNet, TechAmerica, and the Silicon Valley Leadership Group.

The law is a win for California residents and California businesses—both high-tech and otherwise.